Post-Keynesian Ideas For A Crisis That Conventional Remedies Cannot Resolve

Recently, Bloomberg’s Mark Halpern in a short clip managed to get an answer from Julian Assange to the question, “what aspect of the recent leaks by WikiLeaks has the media under-reported” and it was, “Everything”.

Russia Today has released the full video (link at the bottom) of a recent Julian Assange interview with John Pilger. In that, Assange talks about corruptions of the Clinton Foundation and how it has been responsible for terrorist funding. Assange also defends against the charges on him by various others that WikiLeaks is trying to put Donald Trump into the White House.

Hillary Clinton is a leader for neoliberals and neocons. She pretends to look progressive but is far from it. She’s for free trade and balanced budgets and a war hawk. She started sounding progressive and lefty in order to compete against Bernie Sanders.

Julian Assange has exposed Hillary Clinton, although the media tries to pretend otherwise with a “meh”, everytime WikiLeaks releases new emails in the past 30 days. But it’s not the case: Democrats and their supporters are fearful of WikiLeaks as can be seen by a Tweet now deleted tweet by Matthew Yglesias in which he accuses WikiLeaks of trying to side with Donald Trump:

Report on the documents all you like, but the tweets show Wikileaks is a pro-Trump disinformation operation not a transparency group.

As Mark Halpern says in the short clip linked above, you have an Australian guy working for an Icelandic organization, in the Ecuadorian Embassy in the United Kingdom striking fear in the heart of the Democratic presidential candidate in the United States – that’s one hell of a story. I should also add, effectively detained by the Swedish government.

The Julian Assange interview with John Pilger is at Russia Today’s YouTube channel. Transcripts are available at John Pilger’s site.

Julian Assange is a probably the third most important figure in the current US elections. I came across a video from earlier this year in which Noam Chomsky defends Julian Assange.

“Free trade” puts a tight reign on the rise in output of economies, takes away a sovereignty from nations and is anti-democratic. Not only that, from the very start, free trade agreements are reached in the most undemocratic ways. Around 2/3rd of this nine-minute video, Chomsky explains how this is so. First, the documents are secretive. Then they are handed over to governments for a yes/no vote, which Chomsky says means they should vote “yes”.

Jason Furman, Chairman of the Council of Economic Advisers to the President of the United States, has an article, The New View Of Fiscal Policy And Its Application for Vox. In this, he admits how wrong economists have been about fiscal policy. I’ve quoted his paper on which the article is based before here on this blog.

Furman says:

A decade ago, the prevalent view about fiscal policy among academic economists could be summarised in four admittedly stylised principles:

Discretionary fiscal policy is dominated by monetary policy as a stabilisation tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.

Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).

Moreover, fiscal stabilisation needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.

Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimising harmful side effects and long-run fiscal harm.

Furman then goes on to highlight how wrong each of the “principles” is.

He also says,

In the immediate postwar decades, economists broadly supported fiscal stimulus (e.g. Blinder and Solow 1973). But much of modern academic macroeconomics has ranged from dismissive of any effect of fiscal policy on the macroeconomy …

While that’s good, the main issue with the article is that it fails to mention that Post-Keynesians have argued about the strong effects of fiscal policy since long. Not only that, Furman advocates fiscal policy coordination across countries:

Finally, there may be larger benefits to undertaking coordinated fiscal action across countries.

Again, this is not “new” in any sense, just non-orthodox. Here is what Nicholas Kaldor said in 1984 in his lecturesCauses Of Growth And Stagnation In The World Economy:

I should like to end this series of lectures by suggesting the outline of a world-wide agreement on the necessary policies for recovery. The programme could be summed up under four main heads:

The first is coordinated fiscal action including a set of consistent balance of payments targets and “full employment” budgets.1 If this does not prove to be politically feasible, it is inevitable that the growth of unemployment will sooner or later force governments to take measures that would make it necessary for them to expand demand without being frustrated by the inevitable balance of payments consequence of expanding their economies relative to their trading partners. This means that there needs to be some form of restriction that would limit the increase in “competitive” imports to some target ratio in relation to exports. Trade liberalisation, which played such an important part in the rapid economic progress during the years of expansion, becomes a serious obstacle to economic recovery in the case of prolonged stagnation due to the inability of countries to achieve a coordinated set of policies. But, given a proper recognition of the problem, that under conditions of unrestricted free trade the actual volume of production and trade may in fact be considerably less than under some system of regulated trade – a system which relates the volume of imports in manufactures from a particular group of countries, such as the members of the EEC, to some mutually agreed ratio to the exports of individual members to the rest of the group – there is no reason why full employment should not be restored through policies of expansion, preferably directed by the expansion of State investment. This coordinated action by all countries, instead of isolated actions by each country, is the first and most important requirement of recovery.

1 At present all countries have fairly large deficits in the general government budget, but these are largely the consequence of the low level of activity. On a “full employment” basis they would show a highly restrictive picture – they would show surpluses and not deficits. Contrary to appearances, the requirement of stability is for expansionary budgets with lower taxes and higher expenditure, and not further fiscal restriction (as is advocated, for example, by M. de Larosiere of the International Monetary Fund).

But finally some sense prevails in the economics community. Jason Furman’s article should be used to argue against anyone who says: “we always knew” even though his/her position has shifted. So there’s nothing new about the “new view”. Just that economists from the mid-70s till now have been orthodox.

Thomas Palley on Robert Dimand’s book on James Tobin, as part of the Great Thinkers in Economics series edited by Tony Thirlwall:

James Tobin was a leading – perhaps the leading – American neo-Keynesian macroeconomist in the era of Keynesian dominance after World War II that extended through to the early 1970s. Along with growth theorist Robert Solow and micro and trade theorist Paul Samuelson, the three substantially shaped what became known as the neoclassical synthesis which fused neoclassical microeconomic theory, Keynesian macro theory, and neoclassical growth theory. The macroeconomic component of the neoclassical synthesis is termed neo-Keynesianism. All three received the Royal Bank of Sweden Prize in Economic Science in Memory of Alfred Nobel, with Tobin winning his prize in 1981. Tobin died in 2002, aged 84.

…

The good news is that Tobin’s macroeconomics remains profoundly relevant and can be revived theoretically, as suggested by the work of Godley and Lavoie (2007). Robert Dimand’s book further motivates the case for that revival.

Policy Research in Macroeconomics (PRIME)’s blog Prime Economicsreminds us of the Treaty of Rome, to establish a European Economic Community, first signed in 1957 which has a Chapter on Balance of Payments:

CHAPTER 2

BALANCE OF PAYMENTS

ARTICLE 104

Each Member State shall pursue the economic policy needed to ensure the equilibrium of its overall balance of payments and to maintain confidence in its currency, while taking care to ensure a high level of employment and a stable level of prices.

ARTICLE 105

In order to facilitate attainment of the objectives set out in Article 104, Member States shall co-ordinate their economic policies. They shall for this purpose provide for co-operation between their appropriate administrative departments and between their central banks. The Commission shall submit to the Council recommendations on how to achieve such co-operation.

In order to promote co-ordination of the policies of Member States in the monetary field to the full extent needed for the functioning of the common market, a Monetary Committee with advisory status is hereby set up. It shall have the following tasks: – to keep under review the monetary and financial situation of the Member States and of the Community and the general payments system of the Member States and to report regularly thereon to the Council and to the Commission; – to deliver opinions at the request of the Council or of the Commission or on its own initiative, for submission to these institutions.

The Member States and the Commission shall each appoint two members of the Monetary Committee.

I have emphasized many times in my blog that Euro Area balance of payments and international investment position imbalances are quite important for the Euro Area. Even before I started writing this blog, I had stressed before anyone else (on other Post-Keynesian blogs) that the imbalances are large and quite important in understanding the crisis.

Of course, imbalances can be corrected by deflating demand and output as has been the case in the Euro Area since the start of the crisis by policy makers. But it’s good to know that the founders of European integration thought of coordinating policies, which implies their policies would have been expansionary. Anyway, had the original ideas not been overthrown, the Euro Area would also have had a central government. Unfortunately neoliberalism became popular in the 1980s and this led to the Maastricht Treaty which forgot the original intentions of the founders.

The Treaty’s opening also has this important line:

RECOGNISING that the removal of existing obstacles calls for concerted action in order to guarantee steady expansion, balanced trade and fair competition

I should mention however that the Euro Area has this thing called the Macroeconomic Imbalance Procedure which tries to address the issue and even thinks of current account surpluses in the balance of payments as an imbalance, but it is still far away from doing anything about it, such as a coordinated fiscal policy expansion.

This is nice video of Julian Assange speaking via teleconference on TPP, TISA and TISA with philosopher Slavoj Žižek and former Greek finance minister, Yanis Varoufakis in a conference organized by Southbank Centre on Nov 16, 2015.

click to see the video on YouTube

The relevant part starts at 1 hour, 15 minutes, 22 seconds.

Excerpts:

[TTP, TTIP and TISA] are a part of a new global economic partition of the world. It is – I think – the most ambitious, concrete plan since the creation of the European Union, since possibly the creation of the WTO, although it goes much further.

…

That organized plan … and it’s the largest plan and will lock in, permanently will lock in a more radical form of neoliberalism into Europe, into South East Asia, into the United States … and must be intellectually engaged with not just left to the vulgarities of whether and how market prices change and how people move.

To radically shift regime behavior we must think clearly and boldly for if we have learned anything, it is that regimes do not want to be changed. We must think beyond those who have gone before us, and discover technological changes that embolden us with ways to act in which our forebears could not. Firstly we must understand what aspect of government or neocorporatist behavior we wish to change or remove. Secondly we must develop a way of thinking about this behavior that is strong enough carry us through the mire of politically distorted language, and into a position of clarity. Finally must use these insights to inspire within us and others a course of ennobling, and effective action

It’s frequently claimed that the US 🇺🇸 has trade deficits but since the US dollar has not collapsed, the ones saying that the US does not have a balance of payments constraint are all wrong.

Now there are several errors in this line of reasoning but going straight to the point: the balance-of-payments constraint is first a constraint on output. There’s a deflationary bias in the US output because of the imbalance in trade.

This article is written in response to a blog postCumulative U.S. Trade Deficits Resulting in Net Profits for the U.S. (and Net Losses for China) at the blog macroblog by the Federal Reserve Bank of Atlanta. The article says:

The United States has run trade deficits for decades (1976 is the last year with a recorded surplus). To illustrate this, chart 1 depicts the cumulative U.S. trade deficit since 1980, which now surpasses $10 trillion. As a result, a drastic deterioration in the U.S. net foreign asset position—the difference between the amount of foreign assets owned by U.S. residents and the amount of U.S. assets owned by foreigners—has occurred. That is, as Americans borrow from the rest of the world to finance the recurring trade deficits, the national net worth goes deeply into the red. Not long ago, many commentators predicted that as a result of this increasing U.S. foreign debt, the U.S. dollar was set to collapse, which would trigger a stampede away from U.S. assets. Of course, this has not happened.

The wording of this itself is problematic. First some definitions:

Here’s from the IMF’s Balance of Payments And International Investment Position Manual (BPM6), pg 9:

The balance of payments is a statistical statement that summarizes transactions between residents and nonresidents during a period. It consists of the goods and services account, the primary income account, the secondary income account, the capital account, and the financial account. Under the double-entry accounting system that underlies the balance of payments, each transaction is recorded as consisting of two entries and the sum of the credit entries and the sum of the debit entries is the same.

What the US has is a positive balance in the secondary income account (more credits than debits) despite running large deficits in the primary account and despite having a large negative net international position. But “net loss” or “net profit” is bad wording to start with. Also the net international investment position itself is not “national net worth” because the latter includes non-financial assets owned by resident economic units and hence doesn’t make an appearance in the international investment position.

Now coming back to the point on output – If the US economy were to run under full capacity at all times with the current account deficit widening and the net international investment position deteriorating relative to gdp without limit, it can then be claimed that the US doesn’t have this problem and the economists worrying about US trade got it all wrong. But that is far from the case. Not only is the US economy not running under full capacity, but so much output has been lost since the beginning of the crisis starting in 2007.

Having an imbalance in trade means that output multipliers aren’t as high as it would have been the case otherwise. So the government expenditure multiplier and private expenditure multiplier are inversely related to the propensity to import and would have been higher if the propensity to import were less.

Usually economists talk about either trade or the financial aspect (i.e. either the current account or the financial account of the balance of payments) but not both together in a single unified framework. Most of the conclusions reached are due to lack of analysis which treat both of them simultaneously. Stock flow consistent models are an exception but other models are so messed up even for the closed-economy that it’s difficult in those models to make progress.

The fact that the US secondary income is in the US’ favour has led economists to draw any conclusion they want from their analysis. Let’s touch one aspect – the tipping point.

The tipping point

Let’s say you have assets worth $100 and earning at 6% annually (such as interest or dividend), and liabilities of $110 paying at 5%. So even though your liabilities are higher than assets, your income on assets ($6) is higher than what you pay on your liabilities ($5.5). So far, so good, so what? While this is not a bad situation, this is unlikely to remain the case forever. For example if your assets stay the same whereas liabilities rise to $130, then the net income is against your favour. You are earning $6 per year but paying $6.5.

The point of the above example is that even though the US earns more on assets held abroad than what it pays nonresident economic units on their financial assets, this process cannot continue forever. Sooner or later, the difference between the assets and liabilities (because of continuous trade deficits) will be so high that the secondary income in the current account in the balance of payments will be negative. So estimating the tipping point is estimating when this will happen.

Surely, if the US runs at full capacity and hence higher trade deficits because of higher national income and income effects on imports, the US will hit the tipping point sooner. At that point nobody can obfuscate the debate by saying that the secondary income balance in the current account of the balance of payments is positive. The international investment position will deteriorate at a much faster rate.

Of course reaching the tipping point itself is not apocalypse. Some countries do have a negative balance in the secondary income account of their balance of payments. The situation can continue as long as markets allow it to go on. When the busts, it will create a problem but nobody has a theory yet on when exactly some busts, although we’ve made progress on identifying unsustainable processes.

The point of the above analysis is that none of the arguments trying to claim directly or implicitly that “current account deficits do not matter” are erroneous.

No, the dollar won’t collapse but the US economy will run from full capacity to keep debts in check. Such as so much lost output in the last 9 years or so. To summarize, there are at least two scenarios here which are either confused or conflated or both by economic commentators:

The US economy running closer to full capacity but with international investment position deteriorating fast and a threat to the US economy and the currency.

Status-quo, where there’s deflationary bias to the US economy and hence consequences to output, employment and income for the bottom of the population but no immediate threat to the international investment position (although deteriorating) and in which there’s no dollar collapse.

The empiric of scenario 2 above cannot be used to argue that scenario 1 is benign because these two are different states of the world.

The solution is another scenario, a scenario 3 in which output is raises by fiscal expansion but the US government also works to address its balance of payments problems. For example, China’s strategy of exports is quite damaging to the US economy and it is important that the US establishment addresses this instead of just saying “it does matter” or that market mechanism will do the trick.

The currency composition of the United Kingdom’s external balance sheet does not amplify risks associated with a sterling depreciation.

Currency mismatches in a country’s external balance sheet can amplify risks associated with a large current account deficit, if a depreciation of the currency leads to a deterioration of the external balance sheet position. Although there are no official statistics on the currency composition of the United Kingdom’s external balance sheet, estimates suggest that around 60% of the stock of external liabilities is denominated in foreign currency, compared with more than 90% of the stock of external assets. This means that, other things equal, a fall in the value of sterling should increase the value of external assets relative to liabilities, improving the United Kingdom’s net foreign asset position which was -6.7% of annualised GDP in 2016 Q1 (Chart A.11).

Of course, it is important to keep in mind that while this is true, large movements in liabilities in can affect corporations and systemic risks can arise if a large corporation fails. But at the same time, assuming risks are contained, the above is beneficial to the UK. Risks associated with Brexit and the fall in the value of the Sterling aren’t as bad as presented by economists 🤡 with the opinion that the UK should remain in the EU.

Ashoka Mody, a professor at Princeton and a scholar at Bruegel has a nice articleDon’t Believe What You’ve Read: The Plummeting Pound Sterling Is Good News For Britain for The Independent.

He argues that a lower value for the Sterling will help rebalance the UK 🇬🇧 economy. Mody says:

It is true that with an overvalued pound, the British public could command more foreign goods and services with their currency. But British producers lost competitiveness at home and abroad. Producers’ incentives to invest were weakened, leading to Britain’s poor productivity performance. And that led to a large current account deficit.

and also that:

[The] “elite” group continues to hold the microphones of policymaking and its words reverberate through the financial press. All these years, however, the strong pound hurt job creation and investment in productivity growth. And those who have long been hurt don’t live in London and don’t hold the microphones.

Ashoka Mody also wrote a highly readable and excellent piece EU referendum: Why The Economic Consensus On Brexit Is Flawed before the EU referendum, which you should still read if you didn’t earlier. It was one of the most important pieces in the media before the referendum. It argued how issues such as fiscal constraction aka austerity were sidelined in the debate.